Goldman Sachs reduces probability of recession in the US in the next 12 months

The chief economist of Goldman SachsPresident Jan Hatzius said on Monday the bank was cutting its probability of a US recession starting in the next 12 months to 20%, from a previous forecast of 25%.

“The main reason for our cut is that recent data has strengthened our confidence that a recession will not be necessary to bring inflation down to an acceptable level.”, he said in a research note.

Market expectations of a “crash landing” (in which the Federal Reserve raises interest rates sends the economy into a recession) have recently been called into question by data on the slowdown in consumer and producer price inflation in June.

The slowdown in inflation would likely lead to more dovish monetary policy in the future. In addition, economic activity has continued to hold up, despite significantly higher borrowing costs since the Fed launched its rate hike campaign in early 2022.

“We expect some slowdown in the next two quarters, mainly due to the sequential slowdown in the growth of real personal disposable income (…) and the drag from the reduction in bank loans“, he claimed Hatzius. However, he expects the economy to continue growing, albeit at a slower than trend rate.

As for the current inversion of the Treasury yield curve, generally considered a harbinger of a coming recession, Hatzius considered that it reflected and at the same time validated economic forecasts “excessively pessimistic”.

An inverted yield curve usually indicates expectations that the fed will lower rates to stimulate the economy. The Goldman Sachs expert stated, however, that there is a “plausible pathway” for the Federal Reserve to cut interest rates just because of the decline in inflation.

Hatzius He added that the US central bank will most likely raise rates another 25 basis points at its policy meeting next week, in what he expects to be the last hike in the current tightening cycle.

Source: Reuters